Green Energy Inc., is a manufacturer of wind turbines. In the annual meeting, the directors are discussing the next year's operation plans. With the country's GDP growing at an impressive pace, overall energy demand is expected to increase by 10 percent annually over the next few years. Wanda Hill, the Director of Sales, claims that the firm is already enjoying economies of scale and so should install new capacity and hire more workers to expand production. However, Edward Sanchez, the Managing Director of the firm, is not in favor of increasing capacity. He is of the opinion that the firm is currently operating at the minimum efficient scale and any further expansion will increase costs. Which of the following, if true, will support Edward's view that the firm is currently operating at the minimum efficient scale?

Question

Cheyenne Perkins

Business

24 April, 02:46

Green Energy Inc., is a manufacturer of wind turbines. In the annual meeting, the directors are discussing the next year's operation plans. With the country's GDP growing at an impressive pace, overall energy demand is expected to increase by 10 percent annually over the next few years. Wanda Hill, the Director of Sales, claims that the firm is already enjoying economies of scale and so should install new capacity and hire more workers to expand production. However, Edward Sanchez, the Managing Director of the firm, is not in favor of increasing capacity. He is of the opinion that the firm is currently operating at the minimum efficient scale and any further expansion will increase costs. Which of the following, if true, will support Edward's view that the firm is currently operating at the minimum efficient scale?

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Answers (1)

Know the Answer?

Marcos Hanson · Answer 1

The correct answer is The firm's average cost of production remained unchanged over the last 100 units.

Explanation:

The minimum efficient scale is called the value of production for which the average long-term cost is minimal and also coincides with the marginal cost.

On the minimum efficient scale it is said that we are in the smallest possible production in which a long-term competitive company would be interested in producing. Below that value, the company would go into losses and should close.

The curve of long-term average costs is obtained from the envelope of the infinite possible curves of short-term average costs for different plant sizes, that is, for different levels of capital. From this envelope, a U-shaped average cost curve is obtained, at which minimum, precisely, the minimum efficient scale is found.